A Multicountry Model of the Term Structures of Interest Rates with a GVAR

Candelon, Bertrand [UCL] Guimaraes Togeiro De Moura, Rubens [UCL]

Global interdependencies have caused affine term structure models (AT SMs) to adopt a multicountry dimension. Nevertheless, recent referenced AT SMs face issues of tractability as the model dimension becomes larger. To close this gap, this paper proposes a AT SM in which the risk factor dynamics follow a global vector-autoregressive (GV AR). AT SM − GV AR renders a parsimonious yield curve parametrization, which allows for a fast estimation process, enables meaningful statistical inference of economic relationships, and produces accurate bond yields out-of-sample forecasting. To empirically illustrate our novel AT SM, we build a markedly integrated economic system composed of three Latin American economies and China. We find that, consequent to its prominent role in the worldwide economy, China’s economic stances have nonnegligible impacts on Latin American yield curve dynamics.